Why banks are taking a cautious approach with fintech

Big corporations and startups have learned some lessons from the last acquisition craze. This time around, they’re more aware of the need to balance technical innovation with cultural integration, and many banks are partnering rather than purchasing.

After a few years of dating fintech startups, Canada’s big six banks are finally ready to put a ring on it.

Right after the New Year, TD Bank paid an undisclosed sum to acquire artificial intelligence startup Layer 6. Although Toronto-based Layer 6 is barely two years old, North America’s sixth largest bank snapped it up faster than you can say ‘transaction.’

Speaking at a recent Economic Club of Canada event in Toronto, TD’s Michael Rhodes said his company “rallied around this pretty quickly” to have an acquisition deal “buttoned up within a couple of weeks” of meeting the Layer 6 team.

To put things into perspective, the two companies first met in December and announced the done deal in early January.

That speedy meet-and-marry scenario may sound like an episode of The Bachelor, but overall, Canada’s banks have actually forged a slower, more cautious relationship with fintech startups.

To guard their financial services turf from challengers like Apple and Google, TD, BMO, CIBC, RBC and Scotiabank have largely chosen to partner with fintechs (including homegrown startups like FlyBits, Borrowell and Sensibill) rather than acquire them outright.

Why have those banks favoured partnering over purchasing? Here’s one possibility to consider.

Marriage is hard

Back in the late 1990s and early 2000s, many corporations went on shopping sprees to buy small tech startups. Some of those marriages — probably a higher percentage than anyone expected — ended in divorce.

Sometimes the startups simply couldn’t deliver on their concepts. In some cases, the market wasn’t ready for their product or, conversely, leapfrogged right past it.

Now that the tech sector has had more than a decade to reflect on what happened, another theory has cropped up: maybe those marriages focused too much on code and not enough on culture.

The Flickr flameout

Remember Flickr? Vancouverite Stewart Butterfield co-founded the photo sharing site in 2004, and it caught fire with users well before Instagram was a twinkle in anyone’s eye. Yahoo! took notice and acquired Flickr for $25 million in 2005.

The marriage lasted until 2008, when things went sour and droves of Flickr team members departed the Yahoo! ship.

In an epic resignation letter meant only for internal HR (but leaked and published everywhere from Gawker to The Guardian), Butterfield wrote that when Flickr was first acquired by Yahoo!, “I knew (Yahoo!) was the place for me,” but since Yahoo! “grew and expanded … I have felt somewhat sidelined” and “been cast adrift.”

According to former Flickr team members quoted anonymously in a Gizmodo story, they increasingly found themselves battling top Yahoo! execs for resources and creative control.

“We spent a lot of time in meetings (with Yahoo!) just defending the product and justifying our decisions,” one Flickr expat told Gizmodo. Former Flickr community manager Heather Champ is quoted in the same article: “I couldn’t continue in my role. I didn’t want to stay and watch (Yahoo!) dismantle everything we’d worked so hard to build.”

We all know how that power struggle ended. Facebook now owns the social universe. Flickr is but a distant flicker in our collective memory chip. Flickr’s technology worked just fine; its cultural fit with Yahoo!, however, did not.

TD’s proposal

Which brings us back to the TD/Layer 6 deal. At that recent Toronto industry event, Rhodes was asked what TD will do to make sure this new marriage succeeds.

“The No. 1 concern is around culture,” replied Rhodes, TD’s group head of innovation, technology and shared services. For Rhodes, integrating Layer 6’s nimble, innovative ways with TD’s traditional corporate culture is just as important as integrating Layer 6 AI with TD’s sprawling legacy IT systems.

“We also want (Layer 6) to have their own identity and sense of purpose,” Rhodes said. “We don’t want to squash that. We want it to persist and grow and add more value to our business and our community, and we can’t do that by having all of us wear ties.”

Seated next to him on stage, conspicuously tieless, was Layer 6 co-founder Tomi Poutanen. The deal, he said, gives Layer 6 the chance to improve service for TD’s 25 million customers, a potential reach that is rare for any small startup.

Poutanen said the deal also allows Layer 6 to stay in Canada, plus the flexibility “do our own self-directed research” and pursue “opportunities in health and other ways to be a good corporate citizen.”

TD is taking a gamble that most Canadian banks, compared with their foreign counterparts, haven’t been willing to take. Not by betting on AI, which is a no-brainer, but by moving beyond collaborating with a fintech to actually buying one.

Startups and big corporations have learned some lessons from the last acquisition craze. This time around, they’re more aware of the need to balance technical innovation with cultural integration.

Let’s hope that for the new generation of fintechs, and the banks that buy them, the marriage morphs into a honeymoon and not a hangover.